I first heard about the concept of bitcoin when I took the money and banking class, comparing the current money system and a possible alternative, bitcoin. Wikipedia defines Bitcoin a payment system invented by Satoshi Nakamoto, which can be transacted directly to sellers by consumers without a central repository or single administrator like the US Treasury. One of the earlier blog posts I wrote is about some advantages of bitcoin and its prospect as a future currency system. However, many people doubt about its realization, pointing out that the new system may not secure and could be hardly accepted by the public already used to the existing structure.

Wall Street Journal, however, contends that bitcoin can be more prospective because some of the U.S.’s proprietary traders and investors are interested in that. Their attentions provide a potential boost to the virtual-currency industry. “They see potential for big profits in trading bitcoin as more investors enter the market and financial-services firms use the currency to streamline transactions (Wall Street Journal).” The involvement is significant for bitcoin because it can also help reduce volatility in the bitcoin market, one of the main problems it has.

Although bitcoin is attractive for many investors who are seeking higher interests (in other words, who believe that bitcoin market will expand), there are numerous challenges that the bitcoin market should overcome to attract more investors and participants. Security is one of the biggest barriers preventing people to invest in or involve in bitcoin. However, according to Wall Street Journal, Noble (New York based startup) provides its platform which will use Nasdaq’s X-stream trading system, a high-tech system for matching market participants’ orders that is used by more than 30 exchanges and marketplaces worldwide. The agreement will pave the way for many firms to hold and trade digital currencies because bitcoin can make the financial system more efficient (more details in my blog post), eliminating transaction fees. Also, “Noble Chief Executive John Betts said he believes Nasdaq’s involvement will help dispel investors’ concerns about the risks of trading in digital currencies (Wall Street Journal).”

With introduction of new technology, bitcoin becomes more attractive to investors who eventually drag more and more actors in the market. It is a synergy effect that investments and actors make in the bitcoin market. But, the market still needs more actors including investors, traders and participants who are hesitating to be involved in bitcoin. In other words, bitcoin should mitigate concerns related to its abuse in illegal activity and volatility. However, I think bitcoin will soon substitute major parts of the current monetary system. Already, investors and firms with technology prove its potential.

The price of a bitcoin has been extremely volatile as of late, with it dropping 44% since the start of the year. That’s right, bitcoin has dropped 44% since January 1st, 2015. That is in fact TWO WEEKS, the value of this currency has dropped from $316.23 to the price of $177.63 on January 13th. This has since recovered slightly to $217.36 at the end of January. This volatility and steep decline of bitcoin’s price has been due largely to bitcoin’s own success. The way bitcoin works, as described by Sweden Boden in his article The Magic of Mining is that bitcoin ‘miners’ have machines that “try to solve fiendishly difficult mathematical puzzles. The solutions are, in themselves, unimportant. Yet by solving the puzzles, the computers earn their owners a reward in bitcoin, a digital “crypto-currency”. As the price of bitcoin has rose to its peak of $834.03 back on January 15th, 2014, more and more people became bitcoin “miners” using data processers to solve these complex math problems which has raised the overall supply of bitcoins to over $3.8 billion worth in circulation. This rise in supply has driven down the price of bitcoins by oversupplying the market.

Michael Casey talks about in his article, Bitcoin’s Plunge Bites ‘Miners’, “The people who most believed in the long-term value of bitcoin holdings are the people who got hurt the most… the price decline is causing turmoil for bitcoin ‘miners’.” These miners are the biggest supporters of bitcoin and believe so much in it that they devote cast resources solely to mining for more coins to earn money. This has created more and more miners creating more and more bitcoins in the market. As the demand for bitcoins hasn’t risen to compensate for this increase in supply, the price of bitcoins has to drop. There have been so many new bitcoin miners that, “the financial challenge has been made more acute by increasingly tough competition to earn bitcoin, the result of a 30-fold increase in the computer firepower being deployed by miners.” . Graph 1 demonstrates what happens when you increase the supply. It drives both the price and quantity down. The only way that the price of bitcoins will go back to making it financially viable to mine for them is if enough people stop their mining efforts. The supply has to decrease in order to raise the price of bitcoins again as demonstrated in Graph 2. This is how bitcoins success has lead to its own demise.

Another potential solution would be to increase the demand for bitcoins. Increasing the amount of places that accept bitcoins, making bitcoin a more viable option to cash, could do this. This will require breaking up the monopoly that governments currently have over currencies. As more places start to accept bitcoins, and as bitcoin becomes more than a safe haven for criminals, this will increase the demand for bitcoin, thereby driving price back up.

Do you know what Bitcoin is? Bitcoin is not a real material which people can touch, but it can be used as real money. Wikipedia defines Bitcoin a payment system invented by Satoshi Nakamoto, which can be transacted directly to sellers by consumers without a central repository or single administrator like the US Treasury.

Wall Street Journal published the Saturday essay about Bitcoin because many economists believe it represents the future of money and global finance. WSJ emphasizes its technology although many critics argue that Bitcoin cannot be survived. “…Bitcoin is much more than a currency. It is a radically new, decentralized system for managing the way societies exchange value…. one of the most powerful innovations in finance in 500 years” (WSJ). Furthermore, Bitcoin has a lot of advantages so that many people expect that it could substitute the existing currency system as well as solve the current fiscal problems.

First of all, Bitcoin is more efficient and less expensive than the existing system (WSJ). “Bitcoin payments are currently processed with either no fees or extremely small fees. Users may include fees with transactions to receive priority processing, which results in faster confirmation of transactions by the network. … can be offered for much lower fees than with PayPal or credit card networks” (bitcoin). Moreover, Bitcoin users are in full control of their transactions with security because they don’t include their personal information to the transaction. So, merchants don’t need to worry about fraud or fraudulent charge-backs and customers are protected from leaking their information (bitcoin).

However, still many people are worried about Bitcoin because of its menu cost, the centralization problem and bad actors. First, it’s hard to convince people use Bitcoin instead of various fiscal methods like credit cards and cash. Most people are unwilling to take their time and efforts to learn “new” things unless there are huge benefits. Additionally, some people say that Bitcoin is the first decentralized digital currency which means it supplies itself while many others disagree with the statement. It is true that in theory the supply of Bitcoin is generated by a computer system, not by the Fed or any other centralized institution. In other words, “money supply” (Bitcoin supply, clearly) cannot be determined by a government. However, there are possibilities that the system could be hacked (coindesk).

Everything has advantages and disadvantages. Although some economists think that Bitcoin is already dead (for example, many people even don’t know what Bitcoin is), I think it can be a good substitute for the current financial system. Bitcoin market will be expanded when its system becomes as stable as credit cards payment does. If the security is guaranteed, other problems Bitcoin has are trivial. “Like any young technology, Bitcoin is a work in progress, but its groundbreaking core software program is constantly being improved. It is open-source and copyright-free, and thus accessible to anyone who wants to peer inside it, copy it, suggest improvements or create applications for it” (WSJ).

The price of a bitcoin has been extremely volatile as of late, with it dropping 44% since the start of the year. That’s right, bitcoin has dropped 44% since January 1st, 2015. That is in fact TWO WEEKS, the value of this currency has dropped from $316.23 to the price of $177.63 on January 13th. This volatility and steep decline of bitcoin’s price has been due largely to bitcoin’s own success. The way bitcoin works, as described by Sweden Boden in his article The Magic of Mining is that bitcoin ‘miners’ have machines that “try to solve fiendishly difficult mathematical puzzles. The solutions are, in themselves, unimportant. Yet by solving the puzzles, the computers earn their owners a reward in bitcoin, a digital “cryptocurrency”. As the price of bitcoin has rose to its peak of $834.03 back on January 15th, 2014, more and more people became bitcoin “miners” using data processers to solve these complex math problems which has raised the overall supply of bitcoins to over $3.8 billion worth in circulation. This rise in supply has driven down the price of bitcoins by oversupplying the market.

Michael Casey talks about in his article, Bitcoin’s Plunge Bites ‘Miners’, “The people who most believed in the long-term value of bitcoin holdings are the people who got hurt the most… the price decline is causing turmoil for bitcoin ‘miners’.” These miners are the biggest supporters of bitcoin and believe so much in it that they devote cast resources solely to mining for more coins to earn money. This has created more and more miners creating more and more bitcoins in the market. As the demand for bitcoins hasn’t risen to compensate for this increase in supply, the price of bitcoins has to drop. There have been so many new bitcoin miners that, “the financial challenge has been made more acute by increasingly tough competition to earn bitcoin, the result of a 30-fold increase in the computer firepower being deployed by miners.” . This graph demonstrates what happens when you increase the supply. It drives both the price and quantity down. The only way that the price of bitcoins will go back to making it financially viable to mine for them is if enough people stop their mining efforts. The supply has to decrease in order to raise the price of bitcoins again. This is how bitcoins success has lead to its own demise and caused its biggest supporters to lose the most.